The United States and the world are engaged in a great debate about new trade agreements. Such pacts used to be called “free-trade agreements”; in fact, they were managed trade agreements, tailored to corporate interests, largely in the US and the European Union. Today, such deals are more often referred to as “partnerships,” as in the Trans-Pacific Partnership (TPP). But they are not partnerships of equals: the US effectively dictates the terms. Fortunately, America’s “partners” are becoming increasingly resistant.

It is not hard to see why. These agreements go well beyond trade, governing investment and intellectual property as well, imposing fundamental changes to countries’ legal, judicial, and regulatory frameworks, without input or accountability through democratic institutions.

Perhaps the most invidious – and most dishonest – part of such agreements concerns investor protection. Of course, investors have to be protected against the risk that rogue governments will seize their property. But that is not what these provisions are about. There have been very few expropriations in recent decades, and investors who want to protect themselves can buy insurance from the Multilateral Investment Guarantee Agency, a World Bank affiliate (the US and other governments provide similar insurance). Nonetheless, the US is demanding such provisions in the TPP, even though many of its “partners” have property protections and judicial systems that are as good as its own.

The real intent of these provisions is to impede health, environmental, safety, and, yes, even financial regulations meant to protect America’s own economy and citizens. Companies can sue governments for full compensation for any reduction in their future expected profits resulting from regulatory changes.

This is not just a theoretical possibility. Philip Morris is suing Uruguay and Australia for requiring warning labels on cigarettes. Admittedly, both countries went a little further than the US, mandating the inclusion of graphic images showing the consequences of cigarette smoking. The labeling is working. It is discouraging smoking. So now Philip Morris is demanding to be compensated for lost profits.

In the future, if we discover that some other product causes health problems (think of asbestos), rather than facing lawsuits for the costs imposed on us, the manufacturer could sue governments for restraining them from killing more people. The same thing could happen if our governments impose more stringent regulations to protect us from the impact of greenhouse-gas emissions.

When I chaired President Bill Clinton’s Council of Economic Advisers, anti-environmentalists tried to enact a similar provision, called “regulatory takings.” They knew that once enacted, regulations would be brought to a halt, simply because government could not afford to pay the compensation. Fortunately, we succeeded in beating back the initiative, both in the courts and in the US Congress.

But now the same groups are attempting an end run around democratic processes by inserting such provisions in trade bills, the contents of which are being kept largely secret from the public (but not from the corporations that are pushing for them). It is only from leaks, and from talking to government officials who seem more committed to democratic processes, that we know what is happening.

Fundamental to America’s system of government is an impartial public judiciary, with legal standards built up over the decades, based on principles of transparency, precedent, and the opportunity to appeal unfavorable decisions. All of this is being set aside, as the new agreements call for private, non-transparent, and very expensive arbitration. Moreover, this arrangement is often rife with conflicts of interest; for example, arbitrators may be a “judge” in one case and an advocate in a related case.

The proceedings are so expensive that Uruguay has had to turn to Michael Bloomberg and other wealthy Americans committed to health to defend itself against Philip Morris. And, though corporations can bring suit, others cannot. If there is a violation of other commitments – on labor and environmental standards, for example – citizens, unions, and civil-society groups have no recourse.

If there ever was a one-sided dispute-resolution mechanism that violates basic principles, this is it. That is why I joined leading US legal experts, including from Harvard, Yale, and Berkeley, in writing a letter to President Barack Obama explaining how damaging to our system of justice these agreements are.

American supporters of such agreements point out that the US has been sued only a few times so far, and has not lost a case. Corporations, however, are just learning how to use these agreements to their advantage.

And high-priced corporate lawyers in the US, Europe, and Japan will likely outmatch the underpaid government lawyers attempting to defend the public interest. Worse still, corporations in advanced countries can create subsidiaries in member countries through which to invest back home, and then sue, giving them a new channel to bloc regulations.

If there were a need for better property protection, and if this private, expensive dispute-resolution mechanism were superior to a public judiciary, we should be changing the law not just for well-heeled foreign companies, but also for our own citizens and small businesses. But there has been no suggestion that this is the case.

Rules and regulations determine the kind of economy and society in which people live. They affect relative bargaining power, with important implications for inequality, a growing problem around the world. The question is whether we should allow rich corporations to use provisions hidden in so-called trade agreements to dictate how we will live in the twenty-first century. I hope citizens in the US, Europe, and the Pacific answer with a resounding no.

26 Apr 2015

How Crosby-Textor propose to rescue Key from the fall out over his casual Pony-Tail stroking.

Rumour has it that the Crosby-Textor spin machine that elevated John Key to the leadership of the National Party and thence to Prime Minister of NZ has been hard pressed to find a convincing argument to justify Key’s penchant for stroking and pulling young women’s hair.

The current line that John is simply being “casual Key” or the he was indulging in “a little horse play and good fun” at the cafe he and his wife frequent has not gone down well with the general public despite what their focus groups of loyal National Party members indicated.

However, rumour has it that a solution to this conundrum has been found.
The Crosby-Textor spinmeisters have been doing a considerable amount of research and now believe that they have the answer which will kill the antagonism towards Key immediately.

According to caucus leaks Crosby-Textor are to arrange, on Key’s return from touring Saudi Arabia, a series of nation wide tours in which ordinary multi-millionaire money speculator John Key will offer to stroke any ordinary lower caste New Zealander’s pony tail or long hair offered to him so that the stroke can benefit from the holy aura that emanates from him.

This holy aura, initially thought to have been confirmed through his success with Merril Lynch as a money trader but now understood to have been bestowed upon Key through his stroking of the Windsor corgis, swapping a barbecued sausage with William Windsor and admiring the royal offspring is reputed to cure diseases and restore the sufferer to the National Party fold.

Crosby-Textor have designed the following structure for the The Key Cure tours.

John Key will arrive in an electorate and set up a grotto in a local shopping mall or other cathedral to capitalism where he will call on those who wish to have their hair stroked, pulled or tugged and thus be cured of any belief in socialism, Labour Party policies or concern about the sale of state assets.

There will be four distinct elements to the process:

1) John Key shall touch (or, alternatively, stroke) the hair of the infected person.
2) John Key will hang a medal around the person's neck. The medal to have a picture of John Key and The Deficit Dragon on one side while the reverse will have a picture of the local National Party MP kissing Key's feet. The recipient will be instructed to wear it at all times so that any anti-National thoughts will be warded off.
3) Passages from the Gospel of Mark (16: 14–20) and the Gospel of John (1: 1–14) are to be read. Mark 16 contains themes that confirm John Key’s immunity to infectious political beliefs: "They shall take up serpents; and if they drink any deadly thing, it shall not hurt them; they shall lay hands on the sick, and they shall recover." Mark 16:18
4) Membership of the National Party will be offered.

While there has been some concern raised among those caucus members seeking to become leader of the Party in the wake of growing disenchantment with Key they have been over-ruled by the supreme council of the National Party.

The belief is that as this process once sustained both the French and British monarchies for several centuries it is highly possible that once John Key begins the hair stroking “Key Cure Progress” he should be able to rise above the present criticism of his casual approach to the ordinary New Zealanders and thus cement in the National Party right to rule and thus assume undisputed rule of the country.

The Country awaits the whole hearted endorsement of this campaign by Mike Hosking, Paul Henry, Patrick Gower and other obedient opinionistas employed by the MSM in New Zealand as their blessings will be seen by Crosby-Textor as essential to giving credibility to the Key Cure Progresses.

11 Apr 2015

Why Tackling Inequality is of such Importance

Stewart Lansley

It has long been recognised that
extreme inequality has many serious social consequences, as well as
causing economic fragility and weakness – now the time has surely come
to act.

There’s a lot of talk about inequality.
From Pope Francis to the Bank of England’s Mark Carney, a rising number
of global figures have declared verbal war on today’s yawning income
gaps. But talk, it seems, is as far as it goes.

In the absence of action, inequality has
continued to grow through the crisis, domestically and globally. In the
UK, the gap between the top and the rest has continued to widen. In the
United States, nearly all the gains from recovery – over 90% – have
been colonised by the very top.

There are a number of reasons for this
gap between rhetoric and reality. Although inequality has been racing up
the political agenda, ‘inequality denial’ remains a potent force,
notably but not just in the US. As the London Mayor, Boris Johnson, puts
it the rich are a ‘put-upon minority` and should be feted and given
‘automatic knighthoods’.

Big corporations and the global
financial elite retain an immense grip over the political classes,
enabling them to dictate on swathes of economic policy, from tax to
business regulation. As the distinguished American economist, Avinash
Persaud, has put it, ‘the regulators have been captured by the
regulated`.

What is at work is a form of
double-speak. World leaders espouse anti-inequality sentiments, while
being complicit in actions that aggravate the income divide. Time and
again, the head of the IMF, Christine Lagarde, has made high profile
attacks on inequality: ‘Excessive inequality is corrosive to growth; it
is corrosive to society.’ Yet the New York based Fund continues to apply
policies that greatly exacerbate the problem. In return for bail-out
loans, for example, the IMF has enforced draconian austerity measures on
a number of southern European states that have impoverished large
sections of their populations.

In part because of the continuing
failure to translate talk into action, the Paris-based OECD has warned
that inequality is set to continue to grow. The average OECD nation, it
predicts, faces ‘an increase in (pre-tax) earnings inequality by 30% in
2060, facing almost the same level of inequality as is seen in the
United States today.’

This echoes the prediction at the heart of Thomas Piketty’s highly influential Capital in the Twenty-First Century,
of ‘a fundamental force for divergence’. Piketty argues that the great
narrowing across western nations – from the early 1930s to the mid-1970s
– was a one-off and we are back to the historic norm of persistently
high and growing inequality.

Does this mean that current levels of
inequality are inevitable and can only continue to deepen? The answer is
no. The historical process is not quite as deterministic as implied in
these pessimistic scenarios. As recognised by Piketty, models of
capitalism are not set in stone. Social and political forces are dynamic
and do change direction. There have been two seismic shifts of
political economy over the last century: the first, the shift from the
pre-war classical market model to the post-war era of regulated,
egalitarian capitalism; then, another fundamental turning point,
triggered by the stagflation crisis of the 1970s, ushered in the era of
inequality-biased market fundamentalism. That model is still largely in
place.

Narrowing today’s yawning income gaps
will require a similar dose of transformative politics. Tinkering here
and there through minor changes on tax and the level of the minimum
wage, slightly more generous doses of redistributive welfare and the
like – will not be enough to turn the rising inequality tide.

So, might history turn again, bringing
another shift in direction to a more progressive, pro-egalitarian era,
and confounding the idea that the post-war era was a one-off, special
case? The big shifts of the 1930s and 1970s were dependent, in each
case, on four central forces: severe economic shock, the intellectual
collapse of the existing model, a loss of faith by the public with the
existing system and a ready-made and credible alternative.

All these factors are at work today,
though to varying degrees. We have been through a severe global crisis.
The market orthodoxy of the last thirty years has a decreasing number of
friends, while most of its central tenets have been discredited. There
is growing public disenchantment with the current model.

What perhaps is missing is a coherent,
ready-made and widely endorsed alternative that would command sufficient
public support. But this was also true of the 1930s and 1970s. The
elements of a new model were being developed and debated in those
decades but did not take a clear shape until many years later. Today,
the precise shape of an alternative and progressive economic and social
settlement is equally uncertain.

Nevertheless, the central elements of an alternative political economy are likely to include:

A new democratic settlement aimed at spreading power as a counter to
big business – to the workforce, town halls, consumers and small
business. Taming runaway and unaccountable corporate power and
rebuilding collective bargaining are essential to achieving greater
equality.

The dispersal of capital ownership more widely through encouraging
alternative business models based around partnerships, co-operatives,
social and mutual enterprise and the introduction of collectivised
social wealth funds, drawing on other examples such as the Alaskan sovereign wealth fund and the Swedish wage earner fund.

Accepting the centrality of the ‘distribution question` in economic
and social policy making, with policies that raise the share of output
going to labour, which raise the earnings floor and lower its ceiling,
and which ensure that the proceeds of growth are more fairly shared.

The remodeling of the financial services industry with new measures
to check rent-seeking activity and steer more resources into wealth
creation through greater financial support for investment and the
establishment of a State Investment Bank.

A war on tax avoidance and the building of a more progressive tax
system – through for example the greater taxation of unearned wealth,
buttressed by a greater emphasis on international co-operation for
dealing with tax avoidance.

Such a mix would represent a major
departure from the existing Anglo-Saxon model of capitalism and from New
Labour’s third way politics. So what are the chances of another key
turning point that would usher in a more progressive and pro-equality
model of capitalism? There are, perhaps, two key potential catalysts for
such a change.

Movements
such as Occupy London have helped to bring inequality onto the
political agenda but there is still a lack of concrete action.

The first is the intensity of political
pressure for a progressive alternative. As the American labour
journalist, Sam Pizzigati, has argued in his book The Rich Don’t Always Win the
evolution of a more equal and fairer society after the war depended on
the way ‘egalitarians had battled, decade after decade, to place and
keep before us a compelling vision of a more equal – and better
– society’. Across large parts of the globe, the post-2008 crisis has
brought an upsurge in grass roots political protest in opposition to the
status quo and in support of a broadly social democratic and
egalitarian alternative.

In the UK, there have been high profile
citizens’ based campaigns against tax dodging companies, for the living
wage and in opposition to austerity measures. Students from 25 countries
are rebelling against the dominance of narrow free-market theories in
university economic courses. The US has seen a sustained wave of
co-ordinated industrial walkouts demanding a higher minimum wage.

Yet, while these protest movements have
pushed the inequality question up the political agenda, they have, to
date, been too piecemeal to trigger the unstoppable momentum for change
necessary to force a more significant rupture in political and economic
thinking. While some have dismissed such movements – the writer John
Gray, for example, claims they show ‘the impotence of opposition and the
absence of alternatives` – such protests are a sign that public
patience with the status quo is thinning and that we may be getting
closer to the political and social limits of inequality. If so,
governments are likely to face a much harder ride unless there is a more
even sharing of the economic pie.

Nevertheless, more, much more, is needed
to force the political hand of what one group of Belfast anti-poverty
campaigners has called ‘the big people`. For that reason, the most
significant catalyst for change is likely to come from the impact of
inequality on economic stability. There is now a growing body of
evidence that extreme inequality breeds fragility, weakens growth and
promotes instability. It was a central factor in driving the global
economy over the cliff in 2008 and has contributed to the depth and
longevity of the crisis.

Over the last three decades, the rise in
inequality has been driven in the main by the steady shift in economic
rewards away from labour and in favour of capital. The OECD has shown
that, from 1990 to 2009, the typical wage share across all 34 OECD
nations fell from 66.1 per cent to 61.7 per cent, resulting in a great
surge in corporate and private cash holdings and leading to what Guy
Ryder, the Director-General of the ILO, has called a ‘dangerous gap between profits and people.’

According to market orthodoxy, this
shift from wages to profits should have led to faster growth and more
stable economies. Instead, it has created a number of highly damaging
distortions, fracturing demand, promoting debt-fuelled consumption and
raising economic risk. Static and falling real wages have cut
wage-financed consumption while booming profits have been associated
with a catastrophic fall in investment.

The effect has been to make growth
increasingly dependent on artificial stimulants, from the mass printing
of money by central banks to the growth of personal debt. While these
provide a temporary economic boost, they eventually lead to
unsustainable hikes in property and business values and stock markets
and so to economic collapse.

Today’s model of capitalism is
dysfunctional. Because of the power of capital, too much economic
activity is geared to the extraction of existing rather than the
creation of new wealth with consequences that have been toxic for
consumers, the workforce, taxpayers and the wider economy. The
distinction between wealth creation and wealth diversion has long been
recognised. As Adam Smith warned in 1776, because of their love of quick
money, ‘the prodigals and projectors’ could lead the economy astray. In
the 1930s it was Keynes who called for the ‘euthanasia of the
rentier`. In a modern-day equivalent, the leading World Bank economist
Branko Milanovic has distinguished between ‘good’ and ‘bad’ inequality.

Despite these long acknowledged dangers,
the ‘distribution question` – of how the cake is divided – once central
to economic thinking, has been buried by the post-1979
counter-revolution in economic thinking. ‘Of the tendencies that are
harmful to sound economics, the most poisonous is to focus on questions
of distribution’, wrote Robert E Lucas, Nobel Prize winner and one of
the principal architects of the pro-market, self-regulating school, in
2003. Today, that question is creeping back onto the agenda, but too
slowly to have yet rebalanced the application of policy.

If we are to build a fairer and more
sustainable economic model, the distribution question needs to be
restored to the heart of economic management. Economies built around
poverty wages and huge corporate and private surpluses are
unsustainable. In that sense, restoring the balance between wages and
profits, and cutting the great income divide, is not just a matter of
social justice and proportionality it is an economic imperative. As long
as national economic cakes are divided so unevenly, economies will
continue to slide from crisis to crisis.

7 Apr 2015

I came across the website of John Holcraft (illustrator) recently. His illustrations encapsulate the effect of the anti-worker zero hour contracting legislation so beloved of the NZ National Party. Here are a few of Holcraft's illustrations that demonstrare the effects of the casualisation of labour that John Key and his cronies have encouraged.

5 Apr 2015

This article is republished from The Automatic Earth blog site. It makes very revealing reading especially as the writer dissects the economic failure that is John Key and his off siders Bill English and Steven Joyce.

For the second time in three years, I’m fortunate enough to spend
some time in New Zealand (or Aotearoa). In 2012, it was all mostly a
pretty crazy touring schedule, but this time is a bit quieter. Still get
to meet tons of people though, in between the relentless Automatic
Earth publishing schedule. And of course people want to ask, once they
know what I do, how I think their country is doing.
My answer is I think New Zealand is much better off than most other
countries, but not because they’re presently richer (disappointing for
many). They’re better off because of the potential here. Which isn’t
being used much at all right now. In fact, New Zealand does about
everything wrong on a political and macro-economic scale. More about
that below.
I’ve been going through some numbers today, and lots of articles, and
I think I have an idea what’s going on. Thank you to my new best friend
Grant here in Northland (is it Kerikeri or Kaikohe?) for providing much
of the reading material and the initial spark.
To begin with, official government data. We love those, don’t we,
wherever we turn our inquisitive heads. Because no government would ever
not be fully open and truthful. This is from Stuff.co.nz, March 19
2015:

New Zealand’s economy grew 3.3% last year, the
fastest since 2007 before the global financial crisis, Statistics NZ
said. Most forecasts expect the economy to keep growing this year and
next, although slightly more slowly than in the past year. For the three
months ended December 31, GDP grew 0.8%, in line with Reserve Bank and
other forecasts. That was led by shop sales and accommodation.

That sounds great compared to most other nations. But then we find
out where the alleged growth has come from (I say alleged because other
data cast a serious doubt on the ‘official’ numbers):

The economy grew a revised 0.9% in the September
quarter, down from 1% reported earlier. Retail and accommodation
increased 2.3% in the December 2014 quarter, buoyed by a 15% increase in international tourist spending, as reported on Wednesday. New Zealand household spending also increased 0.6%. [..] “Spending by Chinese, US, and UK visitors all increased in
2014, though Australians spent less.” Australia is New Zealand’s biggest
tourism market, but the New Zealand dollar has been high against the
Australian currency, trading at A96.5c on Thursday. The exchange rate
was under A80c at the start of 2013. Total visitor spending last year hit $7.4 billion, up 13% on the previous year. [..]

(Note: $1 US = $1.3156 NZ today.)

Increased banking activity was reflected in a 1.1% rise in financial services this quarter, while housing investment rose 5.2%. [..] The figures also showed the first fall in real incomes
since the middle of 2012. The inflation-adjusted purchasing power of
disposable income was down 0.5% in the December quarter.

We’ll get back to housing in a bit. And by all means, keep those last
few numbers in mind: while the economy ostensibly grew by 3.3%,
disposable income was down. That’s what you call a warning sign.
But let’s focus first on tourism and especially on China. While
overall tourist spending rose 15% in 2014, as part of a later quote in
this article we will even see that “tourism from China was up 40% in the first two months of this year from a year ago..”
Still, that cannot make up for that other big trade with China,
exports, in particular of New Zealand’s biggest industry, dairy, and the
second biggest, timber. There things are not looking nearly as rosy.
And after reading the next piece, I’m wondering how the economy could
possibly have grown by 3.3%. More from Stuff.co.nz, dated March 25:

New Zealand posted a small trade surplus of just $50
million in February with dairy exports down heavily, especially to
China, New Zealand’s top export market. Some economists had expected a
monthly surplus of about $350 million. The trade shortfall for the year
ended February 2015 was a deficit of $2.2 billion. Exports to China have
boomed in the past few years, but melted down last year as dairy
product prices plunged. Total exports to China in February were down more than 36% on the same month last year.China remains New Zealand’s biggest export market, worth almost $9b in the past year, just slightly ahead of Australia. But the trend for exports to China has been falling for the past year, and is down 45% from the peak in late 2013.
In fact, it has returned to levels seen in 2012. [..] Total exports
were worth $3.9b for the month, just barely ahead of monthly imports
which were also about $3.9b.

So sure, the 3.3% was over 2014, and this piece concerns this year. But it also says ‘the trend for exports to China has been falling for the past year,’ and ‘..The trade shortfall for the year ended February 2015 was a deficit of $2.2 billion..’ and that can only leave me wondering again what real GDP growth was. This is from RadioNZ, April 3:

Confidence among manufacturers and exporters has taken a hit with export sales in February down 27% compared with a year ago.
A survey found net confidence – which includes measures of cash flow,
profitability, investment, staff and sales – fell into negative
territory for the first time since April 2013. Net confidence was minus
13, down from 21 in January. The sample of Manufacturers and Exporters
Association members covered companies with combined annual sales of $178
million, with 68% of those from exports. Association president Tom
Thomson said currency volatility was the biggest issue for exporters,
with the big jump in the US dollar forcing up the price of some raw
materials.

Now I’m wondering which raw materials this fine man has in mind. See,
I can imagine currency volatility being a bit of a drag, but not too
much for New Zealand manufacturers, because as far as I can see the
country’s exporters don’t seem to import much in the way of raw
materials. The main exports, as I said, are dairy and timber, with a bit
of meat thrown in, none of which require raw materials imports, and
what the US dollar drives up in there would help New Zealand more than
hurt it. That the New Zealand dollar itself has gained vs various other
currencies, while true, is a whole other story.
New Zealand’s dairy industry has been thrown together since the start
of the century in co-op Fonterra, good for 30% of global dairy exports –
most dairy farmers are shareholders (mind you, no country the size of
New Zealand should ever even think of exporting 30% of the world’s
anything, of course, unless it’s something unique on the planet and it
comes in small quantities). Fonterra’s by far biggest clients are the
lactose-intolerant Chinese, who import about all the milkpowder – for
their babies – they can lay their hands on, following a domestic tainted
milk scandal a few years back. Still, to establish your biggest
industry around one single client is obviously a very risky venture. And
now there’s the added problem of dropping prices. The New Zealand
Herald, April 2:

International dairy prices continued to reverse gains
made early this year at this morning’s GlobalDairyTrade (GDT) auction,
putting downward pressure on Fonterra’s $4.70 a kg farmgate milk price
forecast and raising concerns about next season’s likely payout. The GDT
price index fell by 10.8% compared with the last sale a fortnight ago,
when prices dropped by 8.8%. Big falls were recorded for the key
products of wholemilk powder – down 13.3% to US$2,538 a tonne, skim milk
powder – down 9.9% to US$2,467/tonne.

That 10.8% price drop occurred in just 2 weeks. There can be no doubt
that if your economy depends so much on one sector and one client,
you’re vulnerable. Probably as much as oil producers, who saw their
prices drop more, but who mostly have higher profit margins. What hasn’t
helped New Zealand dairy farmers is the Russian ban on EU milk
products; these will now have to be sold on world markets. What won’t
help either is the recent lifting of EU milk quotas, which will bring a
huge flood of additional milk on the market. A market that is already
drowning in milk. RadioNZ, April 2:

The Government is blaming a slump in milk prices on
the world market being awash with milk. But New Zealand First leader
Winston Peters said National’s economic policies and the high value of
the New Zealand dollar were not helping dairy farmers. In the Global
Dairy Trade auction prices dropped 10.8% overnight to $US2746 a tonne,
the second fall in a fortnight. Mr Peters said he predicted the fall and
it was a sign of rural areas lagging behind. “I’ve been saying it for a
long long time – what you’ve got is a fixation with Auckland, hollowing
out the provincial economies and sucking all the attention and money to
Auckland and that is not going to go on any longer.”
Mr Peters said New Zealand had a free market system that no other
country followed and he would legislate to control the exchange rate,
similar to Singapore’s system. “The one country that’s not devaluing at the moment is New Zealand – every other economy has.
[..] Economic Development Minister Steven Joyce firmly rejected that
idea. “Well, with the greatest respect to Winston I am old enough, and
so is he, to remember the last time we tried to set the exchange rate in
this country and it wasn’t that successful… “What he is basically saying is that he would legislate,
presumably, to put the exchange rate at a level it won’t naturally go
and that means effectively increasing costs for the consumer and
decreasing costs for exporters.” [..] Meanwhile, the Fonterra
Shareholders Council said some frustrated farmers were considering
leaving the co-operative due to the price slump.

For more than a few farmers, the situation has already proved too much. NZ Herald, Jan 11:

At least four farmers have taken their lives since
Fonterra cut its milk payout forecast for the coming season. On December
10, the dairy giant dropped its payout forecast for 2014-15 to an
eight-year low of $4.70 a kilogram of milk solids. That’s nearly half
the $8.40 paid in the 2013-14 season and is estimated to mean an income
drop for farmers of $6.6 billion. Federated Farmers dairy industry group
vice-chairman Kevin Robinson confirmed to the Herald on Sunday that it
was aware of the December deaths. “There’s been discussion through
Federated Farmers email about them,” he said.
Several industry experts blame high levels of rural debt for increased stress on farmers. In total, 14 farmers have taken their lives in the past six months,
Chief Coroner Judge Neil MacLean said. The most recent four deaths were
also confirmed by Te Aroha farmer Sue McKay, the administrator of a
private Facebook-based support group. She added: “I also know some local
hospitals have a number of farmers in them from attempted suicide. If
there’s three in one ward alone, there will be more in other hospitals.”Whole milk powder prices were down 11% in the month and 52% lower than a year earlier. Cheese also dropped 5% over the month.

But New Zealand also has a whole different side. If anything could
explain the 3.3% GDP growth number for 2014, I’m guessing it must be
this: a real estate bubble that would put most of Charles Ponzi’s heirs
to shame. Not 10 years ago, mind you, Americans, but today. Will they
never learn, you ask? No, they will have to have their faces pushed
squarely through the stucco walls. And they’ll probably still have hope
for a recovery when they come out at the other side. NZ Herald, April 5:

Council valuations are already out of date, with homes selling in Auckland’s overheated property market on average for more than 15% above their figure of six months ago.
And previously unfashionable suburbs have recorded some of the biggest
spikes as desperate buyers look for their first home. Mt Roskill made
the biggest jump in the Real Estate Institute figures, which are based
on Auckland sales in February and compared against capital valuations
made in July last year. The valuations, which do not involve a property
inspection or include chattels, were made public on October 1.
Even suburbs among the 10 with lowest rises, such as Remuera and Te
Atatu Peninsula, were up 13%. Properties sold by Bayleys Real Estate
last month included a West Harbour home bought for $700,000 more than
its capital valuation of $900,000 and a Glendowie home with a capital
value of $1.13m that sold for $1.575m. An Avondale home sold for
$590,000 — $130,000 above valuation.REINZ chief executive Colleen Milne wasn’t surprised because
city fringe suburbs were now out of reach for many. The hot market made
it hard for capital values to keep up, Milne said. “There has been a 19.9% median movement in Auckland in the last 18 months.
I thought the CVs seemed to be quite appropriate at the time, but the
whole thing is just supply and demand — we have a lack of houses,” she
told the Herald on Sunday.

A ’19.9% median movement in Auckland in the last 18 months’ is about
13.25% per year, a doubling time of just over 7 years. Auckland
apartment prices in the Trade.me graph below, which covers February
2014-February 2015, would double every 3-4 years.

It must be an Anglo-Saxon disease. You can see it in London, in
Sydney, Melbourne, New York, Toronto. The new normal way to make your
failing economy look ‘healthy’ is to sell assets to any rich foreigner
or investment fund who comes knocking, no matter what the consequences,
short term or long term. In all these cities, young people can forget
about buying a home, that allegedly government supported dream.
And everyone but the rich are pushed out ever further into the
boondock burbs. It’s a ‘policy’ that kills cities, of necessity. Cities
need people, real people, all people, poor and rich and old and young,
that have grown up where they live, they love where they live, they are
interested in making it look good and feel good. This is an ongoing and
organic process, because cities are alive, and yes, you can kill them.
But that’s for another story.
Back to New Zealand’s reality for the vast majority of people, who
will never be able to fork over 100s of 1000s of dollars for a house.
People like the workers in the timber industry, who see slowing Chinese
demand translated into job cuts both for those who cut the trees and
those who transport them.
Again, a dumb idea to base a whole industry around one client, but
the men and women who did the job were just glad they had work. And now
they don’t anymore. Jobs that in all likelihood will never come back
again. China won’t have another debt-financed growth spurt, and there
are no other candidates waiting on the horizon.
And that’s all a big shame. New Zealand is not poor, but it’s by no
means as rich as Australia or Canada or Germany or the US. What it does
have is the potential to be largely self-sufficient. A potential that is
being squandered in order to play with the big boys of globalized
trade.
New Zealand has only 4.5 million citizens, one third of which live in
Auckland. It has vast tracts of productive land that are now used to
feed export oriented cows and American pines, neither of which are even
native. It could have a great shoe industry, plenty of leather, and a
textile industry, plenty of wool. But New Zealand, like everyone else,
imports such basic needs from China. While having scores of unemployed
people. When will that light go off?
The country’s prime minister since 2008, John Key, used to work at
Merrill Lynch and the New York Fed, and that sort of background
guarantees valiant efforts to sell anything in the country that’s not
bolted down, and take an axe to what is. It also guarantees zero
initiative to become self-sufficient.
But then there are many tragic countries and societies in the world
who all suffer from the same maladie. I’ll leave you with some
reflections by the man who I’m told is New Zealand’s best business
writer, Bernard Hickey in the NZ Herald:

Chaos theory calls it the butterfly effect. It’s the
idea that a butterfly flapping its wings in the Amazon could cause a
tornado in Texas. The New Zealand economy has plenty of its own
butterflies changing the weather for GDP growth, jobs, interest rates,
inflation and house prices. [..] One of the flappiest at the moment is
the global iron ore price.
It’s barely noticed here but it’s an indicator of growing trouble
inside our largest trading partner, China, and it is knocking our
second-largest partner, Australia, for six. It fell to a 10-year low of
almost US$50 a tonne this week and is down from a peak of more than
US$170 a tonne in early 2011.
China embarked on an infrastructure spree after the global financial
crisis. Over the three years to 2013, China poured 6.4 gigatonnes of
concrete, which was more than was poured in the US in the entire 20th
century. All that concrete needed reinforcing with steel and China
didn’t have enough iron ore and coking coal to make it. That building
boom created a glut of apartments and debt, which China now needs to
digest. [..]
.. iron ore production in Australia has only now ramped up to its
peak levels. Weak demand met high supply to produce a price slump. This
all may seem irrelevant to New Zealand, but it’s not. The Australian
dollar has fallen in response to the iron ore crash, while New Zealand’s
dollar has remained strong because our economy is humming along, thanks
to building surges in Christchurch and Auckland and plenty of spending
and investment.
That divergence between the Australasian economies drove the New
Zealand dollar to a record high of well over AUD$98 this week. Dollar
parity would make all those winter holidays on the Australia Gold Coast
and trips to shows in Sydney and Melbourne cheaper and generate a fierce
headwind for manufacturing exporters and tourism businesses here that
sell to Australians.
President Xi has reinforced the contrasting effects of the changes in
China on Australia and New Zealand by encouraging consumers and
investors to spend more of China’s big trade surpluses overseas. Tourism from China was up 40% in the first two months of this year from a year ago, and there remains plenty of demand from investors in China for New Zealand assets.
The dark side of this tornado in New Zealand after the flapping of
the butterfly’s wings in China was felt in Nelson this week. The
region’s biggest logging trucking firm, Waimea Contract Carriers, was
put into voluntary administration owing $14m, partly because of a slump
in log exports to China in the past six months. That’s because New Zealand’s logs are now mostly shipped to
China to be timber boxing for the concrete being poured in its new
“ghost” cities. The Chinese iron ore butterfly has flapped and now we’re
seeing Gold Coast winter breaks become cheaper and logging contracts
rarer.

17 Mar 2015

This talk by Robert Reich, courtesy of Social Journal Europe, demonstrates the fallacies that underpin the economic policies entrenched in the National Party and their fellow conservative poltical allies.
It makes rivetting viewing and provides even more reasons why NZ needs to be looking at more socially responsible and responsive policies.
http://www.socialeurope.eu/2015/03/the-3-biggest-economic-myths/

16 Dec 2014

In
the pantheon of economic theories, the tradeoff between equality and
efficiency used to occupy an exalted position. The American economist
Arthur Okun, whose classic work on the topic is called Equality and Efficiency: The Big Tradeoff,
believed that public policies revolved around managing the tension
between those two values. As recently as 2007, when New York University
economist Thomas Sargent, addressing the graduating class at
the University of California, Berkeley, summarized the wisdom of
economics in 12 short principles, the tradeoff was among them.

The
belief that boosting equality requires sacrificing economic efficiency
is grounded in one of the most cherished ideas in economics: incentives.
Firms and individuals need the prospect of higher incomes to save,
invest, work hard, and innovate. If taxation of profitable firms and
rich households blunts those prospects, the result is reduced effort and
lower economic growth. Communist countries, where egalitarian
experiments led to economic disaster, long served as “Exhibit A” in the
case against redistributive policies.

In
recent years, however, neither economic theory nor empirical evidence
has been kind to the presumed tradeoff. Economists have produced new
arguments showing why good economic performance is not only compatible
with distributive fairness, but may even demand it.

For
example, in high-inequality societies, where poor households are
deprived of economic and educational opportunities, economic growth is
depressed. Then there are the Scandinavian countries, where egalitarian
policies evidently have not stood in the way of economic prosperity.

Early this year, economists at the International Monetary Fund produced empirical results that
seemed to upend the old consensus. They found that greater equality is
associated with faster subsequent medium-term growth, both across and
within countries.

In high-inequality societies,
where poor households are deprived of economic and educational
opportunities, economic growth is depressed.

Moreover,
redistributive policies did not appear to have any detrimental effects
on economic performance. We can have our cake, it seems, and eat it,
too. That is a striking result – all the more so because it comes from
the IMF, an institution hardly known for heterodox or radical ideas.

Economics
is a science that can claim to have uncovered few, if any, universal
truths. Like almost everything else in social life, the relationship
between equality and economic performance is likely to be contingent
rather than fixed, depending on the deeper causes of inequality and many
mediating factors. So the emerging new consensus on the harmful effects
of inequality is as likely to mislead as the old one was.

Consider,
for example, the relationship between industrialization and inequality.
In a poor country where the bulk of the workforce is employed in
traditional agriculture, the rise of urban industrial opportunities is
likely to produce inequality, at least during the early stages of
industrialization. As farmers move to cities and earn higher pay, income
gaps open up. And yet this is the same process that produces economic
growth; all successful developing countries have gone through it. In
China, for example, rapid economic growth after the late 1970s was
associated with a significant rise in inequality. Roughly half of the
increase was the result of urban-rural earnings gaps, which also acted
as the engine of growth.

According to Dani Rodrik, we have to distinguish between good and bad inequality.

Or
consider transfer policies that tax the rich and the middle classes in
order to increase the income of poor households. Many countries in Latin
America, such as Mexico and Bolivia, undertook such policies in a
fiscally prudent manner, ensuring that government deficits would not
lead to high debt and macroeconomic instability.

On
the other hand, Venezuela’s aggressive redistributive transfers under
Hugo Chávez and his successor, Nicolás Maduro, were financed by
temporary oil revenues, placing both the transfers and macroeconomic
stability at risk. Even though inequality has been reduced in Venezuela
(for the time being), the economy’s growth prospects have been severely
weakened.

Latin
America is the only world region where inequality has declined since
the early 1990s. Improved social policies and increased investment in
education have been substantial factors. But the decline in the pay
differential between skilled and unskilled workers – what economists
call the “skill premium” – has also played an important role. Whether this is good news or bad for economic growth depends on why the skill premium has fallen.

If
pay differentials have narrowed because of an increase in the relative
supply of skilled workers, we can be hopeful that declining inequality
in Latin America will not stand in the way of faster growth (and may
even be an early indicator of it). But if the underlying cause is the
decline in demand for skilled workers, smaller differentials would
suggest that the modern, skill-intensive industries on which future
growth depends are not expanding sufficiently.

It is good that economists no longer regard the equality-efficiency tradeoff as an iron law.

In the advanced countries, the causes of rising inequality are still being debated.
Automation and other technological changes, globalization, weaker trade
unions, erosion of minimum wages, financialization, and changing norms
about acceptable pay gaps within enterprises have all played a role,
with different weights in the United States relative to Europe. Each one
of these drivers has a different effect on growth. While technological
progress clearly fosters growth, the rise of finance since the 1990s has
probably had an adverse effect, via financial crises and the
accumulation of debt.

It
is good that economists no longer regard the equality-efficiency
tradeoff as an iron law. We should not invert the error and conclude
that greater equality and better economic performance always go
together. After all, there really is only one universal truth in
economics: It depends.